Intrinsic value is the discounted value of the cash that can be taken out of a business during its remaining life.
It is not a simple value to calculate and must be estimated. This estimate will also depend on the interest rates and any forecasts of future cash flows. That is why Warren Buffett never gives an estimate of their own intrinsic value.
What is regularly reported is their per-share book value, which can be easily calculated but is of less use. This is because the book value of the companies that Berkshire controls may be far different from their intrinsic value.
For example in 1964, Berkshire’s per-share book value was $19.46. This far exceeded the company’s intrinsic value as all of the company’s resources were tied up in a non-performing textile business.
Now, the situation is reversed and Berkshire’s book value far understates their intrinsic value.
Nevertheless, the book value is still reported as it serves as a rough tracking measure for the intrinsic value. In any year, the percentage change in book value is reasonably close to that year’s change in intrinsic value.
As an analogy, consider a college educaion and think of the education’s cost as “book value”. The intrinsic value of the education is calculated by estimating the earnings of the graduate over his lifetime and subtracting from that figure an estimate of what he would have earned had he lacked his education. The final figure is then discounted back to present day figures using an appropriate interest rate.
Some graduates mya find that their book value of their education exceeds its intrinsic value and some may find otherwise. Whatever the case, it is clear that book value is meaningless as an indicator of intrinsic value.
On The Managing of Berkshire after Buffett’s Death
Warren and Charlie attend mainly to the task of capital allocation and leave all the running to the managers of the subsidiaries. Out of Berkshire’s 217,000 employees, only 19 of them are at headquarters.
The managers have total control over operating decisions and will dispatch any excess cash they generate to headquarters.
On Buffett’s death, none of his shares will have to be sold. They will be left to foundations who will receive them in installments over a dozen or so years.
The Buffett family will not be involved in managing the business but will help to pick and oversee the managers who do. Essentially, Warren Buffett’s job will be spilt into two parts. One executive who will be responsible for investments, and a CEO who will be in charge of operations. Any acquisition decisions will be mabe by the two with the approval of the board. These people have already been identified.